SCOTUS class arbitration waiver decision a boon for employers, a blow to employees, a narrow take on Section 7

In one of the most significant and highly anticipated employment decisions in years, a divided U.S. Supreme Court in Epic Systems Corp. v. Lewis held that the NLRA does not endow employees with the right to pursue class action lawsuits. The Federal Arbitration Act (FAA) strongly favors the arbitration of disputes, including employment-related disputes, and the FAA instructs federal courts to enforce arbitration agreements according to their terms, including terms mandating individualized proceedings, according to the High Court. Therefore, employers are free to compel employees, as a condition of employment, to agree to waive the right to file suit and to force them instead into arbitration—and to require that such arbitration proceed on an individual, not classwide basis.

The 5-4 decision and its holding was hardly surprising given the ideological proclivities of the Justices and the Court’s recent arbitration jurisprudence. Yet it dealt a critical blow to employees who might have hoped to have their day in court alongside their coworkers. For employers, though, the news comes as welcome and definitive relief: a clear assurance, as a matter of legal certainty, that they may utilize mandatory arbitration agreements containing class and collective waivers to eliminate the costs and potential exposure of class litigation.

Strength in numbers? For employees, there is strength in numbers. This notion, indeed, is the underlying thrust of the NLRA, and it certainly explains the rise in class and collective action filings. “Individually, their claims are small, scarcely of a size warranting the expense of seeking redress alone,” dissenting Justice Ginsburg wrote of the underlying plaintiffs in the trio of cases before the Court (one of whom was a low-paid gas station attendant seeking pay for off-the-clock work). The NLRA endeavored to alleviate “the extreme imbalance once prevalent in our Nation’s workplaces,” she urged, explaining why the majority opinion, in her view, is “egregiously wrong.”

“The Supreme Court today said it is permissible for employers effectively to coerce their employees into giving up their right to join together in lawsuits when employers steal their wages, discriminate against them or subject them to illegal workplace conditions. Corporations across the country surely will take up the invitation,” predicted Robert Weissman, President of the nonprofit Public Citizen, which had filed an amicus brief in the case.

The Economic Policy Institute said the decision “deals a significant blow to the fundamental right of workers in this country to join together to address workplace disputes,” adding that arbitration agreements “bar access to the courts for all types of employment-related claims, including those based on the Fair Labor Standards Act, Title VII of the Civil Rights Act, and the Family Medical Leave Act. This means that a worker who is not paid fairly, discriminated against, or sexually harassed, is forced into a process that overwhelmingly favors the employer—and forced to manage this process alone, even though these issues are rarely confined to one single worker.”

“This decision paves the way for employers to impede access to justice for millions of individuals who are survivors of discrimination, harassment, pay inequality and more,” according to Fair Arbitration Now, a network of more than 70 consumer, labor, legal, and community organizations. “The Supreme Court has narrowed the rights of individuals to access justice for the past 30 years, and forced arbitration clauses have become ubiquitous in our lives. Now, the Supreme Court has given its blessing to corporations to force you to sign away the right to band together with co-workers to defend your civil rights just to get a job.”

“The Supreme Court’s decision is a devastating blow to the fundamental rights of workers as more and more corporations move to silence harassed, abused, and mistreated employees by forcing them into arbitration,” the American Association for Justice (AAJ) said. (The trial lawyer’s group also had filed an amicus brief in the case.)

The groups uniformly called for Congress to overturn the Supreme Court decision, presumably by amending the NLRA or other legislative means (no doubt a quixotic plea in today’s political climate). “Congress needs to take action to restore the rights of all Americans to seek justice when corporations break the law, rather than continue to allow corporations to exploit workers and consumers by hiding behind secretive arbitration,” the AAJ added.

Plaintiff firms shrug shoulders. Class-action employment firm Nichols Kaster, which largely pioneered the “call their bluff” approach of filing individual arbitrations when faced with class arbitration waivers, had a more measured response, voicing displeasure but appearing relatively unfazed, for the most part. “We agree with Justice Ginsburg that the Court’s decision in Epic Systems is ‘egregiously wrong,’” said Matthew C. Helland, managing partner of the firm’s San Francisco office. He added, though: “While the decision might inspire more employers to include class and collective action waivers in arbitration agreements, it has been our experience that wage and hour defendants often hesitate to enforce such waivers—and for good reason. Individualized arbitration is incredibly expensive for employers. It can lead to conflicting awards and unpredictable results (as Justice Ginsburg notes in her dissent). Our firm has every intention to continue arbitrating individual wage and hour claims whenever the case demands it.”

Notably, the two Wisconsin law firms that represent the named plaintiff in Epic Systems quickly announced they would vindicate their client’s rights through individual arbitration. Said David Zoeller of the plaintiff’s firm Hawks Quindel S.C.: “while we are disappointed in the decision, and agree with Justice Ginsberg’s dissent criticizing the Court’s willingness to suppress worker’s rights through the enforcement of unbargained-for labor contracts, and reminding us of labor law’s central purpose of allowing employees to gain strength in numbers, this decision does not end this case or others like it. Where an employer fails to comply with state or federal employment laws, it cannot hide behind individual arbitration provisions to avoid liability.”

“As it stands now, a legislative effort is needed to reinstate employees’ right to join together and stand up against employers who do not follow the law,” Zoeller said. “Until that time, the firms representing Mr. Lewis emphasize that they are not deterred from seeking justice for employees’ subject to mandatory individual arbitration who have been the victims of wage theft or other abuses at the hands of their employers.”

“Monumentally important.” “Neither the holding nor the rationale for the holding is surprising, but it still is monumentally important for everyone involved,” said Ron Chapman, Jr., an Ogletree Deakins shareholder. Chapman, who is based in the management-side firm’s Dallas office, served as the lead counsel in D.R. Horton, Inc. v. NLRB, the Fifth Circuit decision overturning the NLRB’s 2012 D.R. Horton ruling.

Chapman’s key takeaway: “It’s important to recognize that individual arbitration allows the parties to get to the merits more quickly. It directs the parties to focus on the merits of the dispute, or lack thereof, and allows them to reach resolution faster.” In this regard, the High Court’s decision is a win-win for employees and employers, he noted. “Those who are most unhappy will be the plaintiff’s class action lawyers,” said Chapman. “The decision eliminates the use of judicial extortion as a weapon. In the past, the leverage point of an employer’s exposure being in the many millions of dollars even if there is a one-percent chance of losing forced employers to settle. But this ruling redirects the parties to the merits, rather than monetary exposure as a tactic.”

Open questions. Still, the case leaves some matters unresolved, including what to do with claims arising out of state statutes that expressly prohibit arbitration—California’s Private Attorneys General Act (PAGA), most notoriously. “Eventually the Supreme Court will have to decide whether representative claims under state law can be subject to arbitration,” Chapman said. “As of today that remains unanswered. Currently, the courts in California have ruled that PAGA claims are not subject to arbitration.”

Chapman also cautioned that the question will become a bigger one as states that are so inclined rush to follow California’s lead in light of the Supreme Court decision. “I fully expect in light of today’s decision that other states will adopt the California approach and allow states to enact representative actions. That will be the new frontier: states that are so politically inclined to try to navigate the Supreme Court’s decision will to try to follow California’s example,” Chapman cautioned.

He also noted there are still a “relatively few” federal laws that expressly provide that claims arising under the statute are not subject to arbitration (the Sarbanes-Oxley Act, for one). Also, while a bipartisan measure currently pending in Congress would bar arbitration of sexual harassment and sex discrimination claims, Chapman sees no cause for alarm. “The class action waiver is the primary driver” of employers resorting to the use of arbitration agreements, he notes, and because of their (usually) individualized nature, sexual harassment claims are seldom brought as a class action. Consequently, such a carve-out is of little concern. (Indeed, Microsoft and, more recently Uber have announced they will waive contractual arbitration requirements in such cases.) The only nagging fear is the slippery slope. “Why is one type of claim worthy of such a bill and others not,” Chapman asked as a matter of policy. “That would be a hard question to answer.”

Few avenues for quashing arbitration. In concluding that the NLRA is not a vehicle for invalidating arbitration agreements, the majority noted that under the FAA, the usual defenses to contract enforcement still apply, including fraud, duress, or unconscionability. But most of these defenses have largely been foreclosed in the employment context, as threat of discharge is insufficient duress in such cases, and the futility of bringing individual claims has done little to stir the Supreme Court’s sympathies in previous arbitration decisions.

“You would have to have a unique set of facts to support a fraud claim,” Chapman agreed, offering, by way of example, a scenario in which the employer misrepresented the impact of the agreement during its rollout. “Absent some uniquely unusual set of facts, those challenges aren’t going to get very far.” And most sophisticated employers will seek guidance of counsel to ensure their arbitration agreements are sound, and properly executed.

Another reason to confer with counsel: “There are certainly down sides to arbitration,” Chapman stressed, when asked whether there was any good reason for an employer not to implement an arbitration agreement. “Employers contemplating the decision need to go into it with their eyes open. For one, whenever there are arbitration agreements, there are challenges to agreements,” he notes, although voicing cautious optimism the Supreme Court has at least put a slight dent in the numbers. “There is also the risk of compromise awards—there is definitely a ‘split the baby’ phenomenon. Consequently, employers may lose more claims in arbitration than they would lose in court.”

Another viable strategy is to implement arbitration agreements but to choose not to enforce the arbitration provision in cases where a judicial resolution might be more advantageous, Chapman said. There is an inherent risk, though, in that the claimant can choose to assert the right to compel arbitration under the agreement too.

Chapman closes with an important point: “If there really is a widespread dispute effecting numerous employees, the parties can go to mediation collectively. They can agree to settle collectively. The parties could still act collectively if they choose.” The Supreme Court did not foreclose this possibility; it merely provides that “the starting point is still individualized arbitration.”

Meanwhile, at the NLRB…. The Board’s decision in D.R. Horton stood for the notion that the NLRA might be used to fend off mandatory arbitration agreements, and it spawned the ongoing controversy and the resulting circuit split. Rulings premised on this ruling are effectively null and void in light of the Supreme Court decision. The agency released a statement after the Supreme Court handed down its decision.

“The Board first held that the maintenance of individual arbitration agreements containing class-action waivers violated the Act in 2012. During the six years that this rule was in place, Board decisions invalidated arbitration agreements and policies used by many employers. With today’s decision by the Supreme Court, employers are permitted to maintain and enforce such class-action waiver agreements,” according to the Board’s issuance. The agency noted it will “expeditiously” resolve the 55 cases currently pending before it alleging that employers unlawfully maintained arbitration agreements with class or collective action waivers, adding too that many similar NLRB rulings are currently pending before federal appeals courts.

Might there be more than meets the eye here though, from a labor law perspective? The Supreme Court’s Epic Systems decision takes an exceedingly narrow view of Section 7 rights—as encompassing the right to join a union and bargain collectively and very little else. Could the majority’s rationale in Epic Systems be applied effectively to rein in the meaning of “protected, concerted activity” (which, some have argued, had reached its outer limits under the Obama Board)? Or was the Court’s rationale uniquely applicable to class arbitration?

For Chapman’s part, he thought the latter, surmising that “without the FAA this is a much different analysis here.” He thinks the Board would have a defensible argument that its expansion of Section 7 in recent years is indirectly tied to the enumerated provisions of Section 7, while arbitration is not even contemplated in this provision. “It’s a bigger jump to get to the conclusion that Section 7 encompasses the right to pursue class or collective action,” he reasoned.

Yet Justice Ginsburg, in dissent, was resolute that “employees’ §7 rights include the right to pursue collective litigation regarding their wages and hours.” Today, it was the view of Justice Gorsuch that prevailed: “This Court has never read a right to class actions into the NLRA—and for three quarters of a century neither did the National Labor Relations Board.” It will be interesting to see the extent to which Epic Systems will fuel the seemingly timeless tug of war between those who would construe “protected, concerted activity” expansively and those who favor a constrained reading of Section 7.

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